Steve Gunderson, President/CEO, Council on Foundations: Philanthropic Leadership in a Changing World

October 16, 2006

Organized philanthropy in the United States finds itself at a pivotal moment. Driven, in part, by new money, new ideas, and increased scrutiny, foundations around the country have been engaged in a re-examination of their core values and practices, even as the introduction of new philanthropic vehicles has broadened the definition of philanthropy and thoroughly democratized the business of giving.

Around the world, in fact, interest in — and expectations surrounding — American philanthropy as a contributor to the common good and a catalyst for social change have never been greater. But whether philanthropy, at the start of a new century, is able to reinvent itself and play a larger role in addressing the unique challenges of our time, while maintaining the flexibility and independence that have been among its defining characteristics, remains an open question.

Recently, Philanthropy News Digest spoke with Steve Gunderson, president and CEO of the Council on Foundations, a membership organization of more than two thousand grantmaking foundations and giving programs worldwide, about public perceptions of foundations and their work, the globalization of philanthropy, and leadership in a time of change.

Gunderson, a native of Wisconsin, served three terms in the Wisconsin State Legislature and sixteen years in the U.S. Congress, where his focus was on preparing America's citizens for the twenty-first-century economy. After voluntarily retiring from Congress in 1996, he served as a senior consultant and managing director of the Washington office of the Greystone Group, a Michigan-based strategic management and communications consulting firm.

A graduate of the University of Wisconsin-Madison, he lives in Arlington, Virginia, with his partner Jonathan Stevens.

Philanthropy News Digest: HR-4, also known as the Pension Protection Act of 2006, was passed by Congress in August and signed into law by President Bush shortly thereafter. The bill includes a package of charitable incentives and reforms that some have characterized as the most sweeping legislation to affect charities since the Tax Reform Act of 1969. In a statement released the day the bill was passed, you and your colleagues spoke out against the bill. What are your objections to HR-4 as it relates to foundations and the charitable sector?

Steve Gunderson: The position we've taken on HR-4 is the most important position the council has taken since I became president of the organization in the fall of 2005. We are strong advocates for reforms in the philanthropic sector, but we believe those reforms have to treat everyone the same way and apply a common set of standards, rules, and regulations to the charitable sector. If you look at the details of HR-4, you'll see that donor-advised funds at community foundations and certain kinds of supporting organizations are being singled out for special treatment, and it's that unfair treatment that the council opposes.

[HR-4] sends the signal that all philanthropy is not created equal....

Moreover, even though the bill includes some of what we assume Senate Finance Committee chairman Charles Grassley (R-IA) believed were important reforms that needed to be made at this point in time, the legislation fails to consider the impact of many of those reforms. You especially see that in the denial of IRA rollover eligibility to donor-advised funds, supporting organizations, and private foundations. Last year's Katrina legislation, for example, made it possible for people to claim 100 percent deductibility for their charitable contributions but failed to give that same tool to supporting organizations and donor-advised funds at community foundations. Now, in HR-4, Congress has decided to deny IRA rollover eligibility to community foundations and supporting organizations, and — adding insult to injury — has also denied it to private foundations. And they didn't even warn us. As I said, that sends the signal that all philanthropy is not created equal, and that's an inappropriate signal, in my view, for government to be sending.

PND: As you know, donor-advised funds and Type 3 supporting organizations have received considerable scrutiny from both Congress and the media after reports of alleged self-dealing at many such organizations began to surface. Is there a way, in your view, to extend IRA rollover eligibility to donor-advised funds and supporting organizations that does not reward people for using those vehicles solely or primarily as estate-planning devices?

SG: The new donor-advised fund and Type III supporting organization reforms enacted as part of HR-4 address the concerns that donors are using these charitable giving vehicles improperly. With the new rules in place, there is no reason why Congress should not extend IRA rollover eligibility to donor-advised funds, supporting organizations, and private foundations.

PND: The bill did not address the question of foundation payout. You're on record as saying it's only a matter of time before members of Congress — and you were an eight-term member of Congress — introduce a bill calling for an increase in the payout rate for private foundations. What are the forces driving the call for a higher payout rate?

SG: There are a couple, and, frankly, they're connected to legitimate concerns. If you followed my speaking and writing over the last decade, you know I'm one of those people who believe we are in a period in which government is in full retreat on the domestic front, with dramatic consequences. I mean, we're seeing needs on the domestic front that are as great as I have seen in my lifetime. And it's absolutely appropriate that many people are concerned that those needs are not being met. If you're the executive of a nonprofit organization trying to deliver services to a population in need and have to confront the fact that the government programs you rely on are being reduced or zeroed out, you're naturally going to look for resources elsewhere — not because you're conditioned to always want more, but simply because there's a legitimate and real public need out there that you're not able to meet.

The second thing that is happening has to do with the perception — and it's fueled, in part, by high-profile media stories like Warren Buffett's donation to the Bill and Melinda Gates Foundation — that there is all sorts of new money pouring into philanthropy. Now, when you combine that perception with the needs that clearly exist in our society, an obvious technical response, in the minds of many people, is to increase the minimum payout rate for foundations. It doesn't cost the government a cent, and it will generate additional resources to meet needs that are not being met. Given that calculus, I think it's very likely to happen in the near future. But the council needs to get involved in those conversations now, because it's going to be a difficult conversation for our members.

PND: You've been candid about this being a difficult and potentially divisive issue for the foundation and nonprofit communities. How would you recommend foundations get ahead of the issue?

SG: We need to explain to foundations that the worst possible scenario for the philanthropic community is to adapt a live-for-today-ignore-tomorrow mentality, especially with respect to the federal deficit. We also need to recognize that one of the strengths of philanthropy is its diversity. We should celebrate those foundations that choose to spend down their endowments during the life of their donors. There's absolutely nothing wrong with that. At the same time, we should celebrate the decision by other foundations to operate in a way that preserves their ability to serve the common good over an extended period of time. That's not a decision government should make. That's a decision for the individual donor to make, and we need to protect that freedom. I don't think anyone can look down the road and say with certainty that the needs and problems of society in the future are going to be any less serious than they are today, so we ought to be moving in a direction that will protect and preserve the ability of foundations to play a role in solving those problems down the road. Given the disappointing stock-market returns of the last few years, however, if you were to increase the minimum payout to 7 percent or 8 percent you'd probably force most foundations into a spend-out scenario.

PND: What about increasing it to 6 percent? Returns haven't been that bad.

SG: If you can tell me what the average market return for a foundation endowment will be over the next ten to twenty years, I could answer that question. But we just don't know.

PND: With government in retreat on the domestic front and increasingly perceived to be dysfunctional, should organized philanthropy try to step in and pick up some of the slack? And, if not, what is the proper role for philanthropy in American society?

SG: That's an important question. Whether you're a liberal or a conservative, I don't know of anybody who believes that philanthropy should aspire to be "government lite." First of all, it's just not possible. Foundations awarded about $30 billion in grants in 2005; the federal budget was about $2.4 trillion. There's just no way philanthropy could or should do what government is supposed to do.

Government is characterized by a one-size-fits-all mentality. That's exactly the opposite of what philanthropy is all about....

The second thing that's important to understand is that philanthropy, by its very nature, is different than government. Government is characterized by a one-size-fits-all mentality. That's exactly the opposite of what philanthropy is all about. Philanthropy is about innovation. It's about creativity. It's about taking risks. We try things and sometimes we fail, but we admit those failures and then we try something new. You can't do that in the public sector with public tax dollars. Part of the benefit philanthropy delivers to society is its willingness to fund pilot projects, to fund creative solutions that prove out and then to offer those to government, at all levels, as models to replicate at an appropriate size and scale.

PND: Do you think foundations and the role they play in society are misunderstood by the public? And, if so, to what do you attribute that disconnect?

SG: I absolutely think that foundations and foundation work are misunderstood, and that was brought home to me most dramatically after Hurricane Katrina, when it became clear that reporters and the media did not understand the difference between charity and philanthropy. Sadly, I don't think we've done much over the last year or so to highlight or explain that difference. I support and am as engaged in charity as any other American. But charity is not philanthropy. Philanthropy is what a friend of mine calls "problem-solving charity." It's more than just the immediate emotional response to a need; it's about taking a strategic approach to long-term problem solving, with strategic being the operative word.

The other thing we need to recognize is that while there's great potential for philanthropy to grow over the next few years, most Americans who have the wherewithal to participate in society in a philanthropic way don't fully understand what philanthropy is or does.

PND: And yet, as one editorial writer recently put it, "giving has become the new earning." To what do you attribute the upsurge of interest in philanthropic solutions to the global challenges we face?

SG: I think it's a part of our changing world. We live in a global economy. We have instant global communications. One of the results of these changes is a recognition that our world is much more connected than ever before. And because of that, the younger generation is very engaged in global economic and justice issues. We see this even in our small family foundations, many of which want to participate in global philanthropy. At the same time, one of our most important constituencies is corporate giving programs. I can name a corporation that just joined the council because they have a presence in no less than forty-six nations. Another has a presence in almost eighty different nations. Both of them, like most corporations, want to be engaged in the communities in which they do business. But today they're faced with different rules, regulations, and tax laws in many of those nations. And it's our view at the council that we need to respond to this challenge in much the same way we pursued trade standards and agreements in the past.

PND: Just before you came aboard as president, the council's board was putting the finishing touches on a new strategic plan for the organization. What is the strategic vision for the council as outlined in that plan? And what do you and your colleagues need to do to turn that vision into reality?

SG: That's a good question, and it has something to do with why I was hired. As most people know, I don't have a lot of professional philanthropic experience. But it was clear to me from my discussions with the search committee that the board wasn't looking for that kind of expertise. In part, that's because they were getting ready to recast the council's mission and, with it, some of the organization's programming. As you know, the Council on Foundations has always been engaged in grantmaker education, with a focus on effective grantmaking. That's been a wonderful building block for the organization and a great contribution to the foundation field. But it's very clear the board wants to move the council beyond that role to a place where it is helping to create a vision and voice for philanthropy at the national level and is a significant player in creating a similar vision and voice on a global level. The reality is that we need to see philanthropy more and more as the engine of social change and embrace the concept of philanthropic leadership. That means more than just making sure your grant application and administration processes, your RFP process, your evaluation and reporting mechanisms are transparent and efficient. Obviously, we all want those things. But we need to do more than that. Those of us who work in philanthropy need to see ourselves as leaders of change within our communities. And how foundations go about doing that is part of the council's new mission.

If you look at the strategic framework laid out by our board, it articulates three specific outcomes that are intended to guide our work. The first is to create an environment in which philanthropy can continue to grow. That includes the legislative side you and I talked about, as well as the educational outreach to the American public we've always done.

The second is to increase the role of philanthropy in serving the common good — that's really the leadership aspect I was just talking about.

Foundations have to understand that they simply can't afford to betray the public trust....

And the third is emphasizing accountability and diversity in all we do. Foundations have to understand that they simply can't afford to betray the public trust, and when there is misconduct in the field, every one of us has to be willing to stand up and address it. The second aspect of this is how we respond to the changing composition of American society. It's imperative that we reflect the face of those we seek to serve. And the third piece of the puzzle is accountability, which we think is more accurately described as effectiveness. Regardless of what you call it, the field has not done a good job of looking at what the public has received in return for its investment in philanthropy, and it needs to do a better job of demonstrating that the tax-exempt assets held by foundations are generating a positive benefit to society. Unfortunately, we don't have a matrix today we can use to do that, although it's something we at the council hope to be able to develop and eventually share and communicate to the public and policy makers.

PND: Is it something you might develop in partnership with other organizations?

SG: That has yet to be determined. We've been talking with a number of people, both in and out of philanthropy, but most of them are engaged in the program side of accountability rather than with the public ROI aspect of it. Certainly, it's a new area for us, but that doesn't mean it's a new discipline. We've had discussions, for example, with people at the Government Accountability Office who have figured out how you calculate return on investment for certain public-sector investments, and we're very interested in exploring whether those techniques and methods might be transferable to the philanthropic sector.

At the same time, I think we need to begin the discussion by acknowledging that some of the things funded by foundations — the local theater or library, a museum, a park or recreational facility — may not lend themselves to a clear-cut analysis of return on investment, even though we know they're important to the quality of life in our communities. In other words, there are some investments that just don't fit neatly into any formula designed to measure effectiveness or return on investment.

PND: Workforce development is an area of particular interest to you. Not too long ago you wrote: "America has five, maybe seven years in which to radically revamp its fundamental assumptions about workforce development and then to act. Whatever is going to be done to prepare us for the shortages of workers and skills, increased global competition, disparities in achievement between ethnic American communities and technology that changes while we sleep — whatever we are going to do, must be done now." Do you think that sense of urgency — not just about workforce development, but about many of the challenges we face as a nation — is shared by your colleagues in the world of philanthropy?

[P]hilanthropy is the only meeting ground where people with different opinions can come together and have a civilized conversation....

SG: Absolutely. You now, I've been struck since I've been at the council by the passion and the vision that I routinely encounter among people working in our field. At the same time, they recognize that we're in a period of transition. And as we make that transition, one of the things I find myself sharing with my colleagues in the sector is the need to recognize that the philanthropic sector may be the only sector in society that can serve as an impartial convener and arbitrator. As we see every day, government in this country is increasingly polarized, and that makes it harder and harder for the public sector to bring together diverse parties to address issues and problems, of any kind. Whether you're talking about education or workforce development or the environment, philanthropy is the only meeting ground today where people with different opinions can come together and have a civilized conversation about how we can move forward together.

PND: On the question of leadership, you've written that "times of flux produce a new kind of leader." What kind of leader is our own time likely to produce? And do you see those kinds of leaders emerging in and from the foundation world?

SG: I do, and I think it's one of the fascinating trends in the field. Look at people like Bill Clinton or Tim Wirth or Doug Bereuter, president of the Asia Foundation, all of whom have had stellar careers in public life and have moved to the philanthropic sector. Or look at all the successful folks from the world of business world — people like Bill Gates, Warren Buffett, and Eli Broad — who have said, "You know, I've been successful in business; now it's time for me to commit some of the resources at my disposal to philanthropic causes." I probably meet with two to three successful senior-level people a week from this town, Washington, D.C., who want to talk to me about transitioning from whatever they happen to be doing into philanthropy. As John Nesbitt would say, it's a megatrend. It's happening, it's accelerating, and we need to recognize and celebrate it. At the same time, we need to recognize that part of what is going on is that philanthropy itself is looking at ways in which it can focus its agenda, increase the amount of expert resources available to it, and maximize outcomes in ways it hasn't done in the past.

PND: In what ways do you expect organized philanthropy to change over the next twenty years?

SG: I've often said that when you think about philanthropy in the twenty-first century, you need to keep in mind the three S's. The first is size, and by that I mean philanthropy is going to grow dramatically in size. You already see evidence of that. There's a World Bank study, for example, that suggests we'll go from $30 billion a year in foundation grants to $300 billion by the year 2050 — and that study was done before Warren Buffett made his announcement. Personally, I think we're going to get to the $300 billion level much sooner than 2050, but that's just my opinion.

The second refers to our service role. By that I mean we're going to see more and more people in philanthropy acting not just as effective stewards of tax-exempt resources but as leaders, as more and more people turn to philanthropy for the kind of visionary leadership needed to address the unique challenges facing our society.

And the third refers to scrutiny. When you grow in size, when you grow in service, you inevitably grow in terms of your visibility, and the higher your profile, the more scrutiny you can expect. Part of my job here is to try to make sure we strike an appropriate, proper balance between federal and state regulation of our sector and the flexibility we need to innovate, which is the hallmark of philanthropy.

PND: Philanthropy is also likely to become more global in outlook, isn't it?

SG: Absolutely. Take this week. I began the week speaking with the International Committee of the Council on Foundations. By mid-week I was engaged in what is now a regular set of phone calls between Gerry Salole and myself. Gerry runs the European Foundation Centre, and he and I are beginning direct and regular cooperation on a number of items. Then I was in discussions with the leadership of both our 2007 annual conference in Seattle and Philanthropy 2008," an initiative of the council to have everyone engaged in philanthropy convene at the same time here in Washington in 2008. I also communicated with the leadership of WINGS, a global network of membership associations and support organizations serving grantmakers, about their fall conference in Bangkok. And just today I visited with the ambassador from Norway regarding philanthropy in his nation. Finally, when I got back to my office, there was a box of books and a very kind letter from Tadashi Yamamoto, the president of the Japan Center for International Exchange, who recently wrote an amazing book called Philanthropy and Reconciliation. These days, it seems every day is global philanthropy day!

PND: As information technologies continue to flatten organizational hierarchies and empower individuals, do you think institutional philanthropy will become less institutional? And is that a good thing?

SG: That's a good question. My guess is that we'll see new forms of philanthropy built around technology that are perhaps less hierarchical and bureaucratic than a traditional foundation. But I don't think foundations will be transformed into technology-driven giving centers. Instead, my expectation is that philanthropy will become as diverse in structure as it will be in mission and ideology. And as I'm fond of saying, let's celebrate that diversity.

PND: Indeed. Well, Steve, thanks for your time this morning.

SG: Thank you.

Mitch Nauffts, PND's editorial director, spoke with Steve Gunderson in August and again in September. For more information on the Newsmakers series, contact Mitch at mfn@foundationcenter.org.